Event synopsis: construction workshop on the legal requirements for payment applications, payment notices and payless notices
by Peter Stockill

On 12 July 2018 members of the Penningtons Manches Construction and Infrastructure team held a workshop with clients to discuss the current state of the law in respect of, among other things, the legal requirements for applications for payment, payment notices and payless notices under construction contracts. The group discussed the following scenarios.

Form and content of applications for payment

The application is described as a “draft final account”

Case law stipulates that “an application for interim payment must be sufficiently clear and unambiguous in form, substance and intent so that the parties have notice of the application made...” (Kersfield Developments (Bridge Road) v Bray and Slaughter Ltd [2017] EWHC 15 (TCC)). It may not be sufficiently clear to a recipient that this application is intended to be an interim application and/or that it is directed to the relevant due date, as opposed to some later date. This undermines any argument that it should be treated as an interim application.

In practice, it is not uncommon in the later stages of a project for documents to be described both as draft final accounts and interim applications. Such an application was treated as a valid interim application in Watkin Jones & Son Ltd v Little UK GmbH [2001] EWHC 453 (TCC).

The application is sent in response to a request and described as an “initial assessment”

This scenario references the situation that arose in Jawaby Property Investment Ltd v The Interiors Group Ltd and another [2016] EWHC 557 (TCC). In response to a request from the contract administrator for an application, the claiming party sent what it described as its “initial assessment”. It was not described as an interim application and did not apply for anything. The description of it as an “initial assessment” indicated a degree of provisionality. The supporting documentation was also lacking. The court held that it was not in form, substance and intent an interim application.

The application is sent by email but the contract refers to notices being served by first-class post

This example again references the circumstances of Jawaby v The Interiors Group. It requires consideration first of the contract terms in relation to notices, in particular whether they are sufficiently clear to prevent notice being given by email. Second, if there is a clear course of dealings whereby notices are given by email and accepted, an estoppel by convention may arise preventing the parties from disputing the validity of such notices.

 

Timing of applications for payment

The application is one day late

Contractual time limits for applications for payment are applied strictly, but if there is a clear course of dealings whereby applications that were similarly late were accepted without reservation of the paying party’s position, then an estoppel by convention may arise. This was the case in Leeds City Council v Waco UK Ltd [2015] EWHC 1400 (TCC).

The application for payment is two weeks early

The reported cases in which a claiming party has sought to rely on an early application for payment have not succeeded, but in principle an early application could be valid. In Leeds v Waco, the application was made only a few days early, but there was no established course of dealings whereby early applications were accepted. The claiming party could only point to one previous occasion and the judge remarked that ‘one swallow does not make a summer’. In Caledonian Modular Ltd v Mar City Development Ltd [2015] EWHC 1855 (TCC) an application was made two weeks early. This was held not to constitute a valid application, although the application was also in a different format and at a different time to the previous applications. Even after it had been challenged, the claiming party failed to make clear that it was intended to be an interim application. This case is therefore an example of the claiming party not being clear enough about its intention. The earliness of the application aggravated this.

The April application is four days late. The payee says it should be treated as an early application for May

In Henia v Beck an alternative argument was made that the late application should be treated as an early application for the following assessment date. This argument failed on the basis that the application would thereby not be clear in form, substance and intent as being an interim application for that assessment date.

 

Payer’s payment notices and payless notices

The payment certificate is one day late

Contractual requirements as to the timing for service of payment certificates, and payless notices, are applied strictly. There is not the same potential for an estoppel by convention to arise in relation to a payment certificate or payless notice as there is with an application for payment.

The payment certificate immediately following practical completion certifies a modest sum, say, £15,000.The payless notice says the sum due is £0 because it is eclipsed by the high number of defects on the project. A list of defects is given, but with no figures

In this scenario it seems likely that a difference of opinion has developed between the employer and the contract administrator, with the employer considering that there are defects that are not fairly reflected in the contract administrator’s valuation and possibly, which might have affected whether practical completion was certified.

As regards the validity of the employer’s payless notice, this example references the Scottish case of Muir Construction Ltd v Kapital Residential Ltd [2017] CSOH 132, in which the payless notice was held to be invalid. The court said that to be valid “the payless notice needed to, at least, set out the grounds for withholding of the sum to each of those grounds to give an indication of how the sums were arrived at”. Based on the information in this scenario, the notice simply states the sum due without setting out the basis on which it has been calculated. It also effectively treats all defects on a global basis, which appears to be at odds with the approach required by the Muir Construction case, particularly given that some or all of the costs of rectifying each defects will be discrete. If the paying party was uncertain as to the costs of rectifying the defects, it ought to have included a provisional assessment providing the best information that it could. Given that only a modest sum was due for payment, it might have preferred to omit some of the defects from its payless notice if they caused difficulty in providing such a calculation and to communicate those separately.

The contract administrator fails to serve a payment notice and the application for payment stands as a default payment note. A payless notice is served stating a sum due that it says is “calculated based on previous valuations”

This references one of the issues that arose in Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC). In that case, the employer’s payless notice referred to the sum stated to be due in the payment notice served only four days earlier (but which was out of time). An adjudicator held that incorporating calculations by reference was not “specifying” the basis on which the sum had been calculated in the payless notice. The Technology and Construction Court disagreed. While the court acknowledged that such a practice carried risk, in that case it was entirely clear what was being referred to and the court was unwilling to rule that incorporation by reference was, in principle, unacceptable. We understand that this aspect of the decision, and others, is the subject of an appeal that will be heard later this year.

In our example, the reference to “previous valuations” does not appear to be clear. Unless the surrounding circumstances mean that a reasonable recipient would have been clear as to what was being referred to, it is likely that the notice will be invalid.

The examples above all imagine that the matters are being looked at after the opportunity to serve a payment notice or payless notice has passed. In practice, paying parties should be alive to the possibility that a communication they have received could be considered to be an application for payment and/or a default payment notice. If in any doubt it is prudent to serve a payment and/or payless notice without prejudice to any primary position that the document is not valid.